When looking at crypto news, prices dominate the cycle. There is constant talk about the major players, the speculative plays, and what their value will look like next year, two years down the line, and well into the future.
Good news for the marketplace as a whole as global crypto funds have hit a record high. A major driving force behind that push has been the diversification efforts of investors who are adding Bitcoin (BTC) and Ethereum (ETH) exchange-traded funds (ETFs) to their portfolios.
Crypto Funds Hit Record High
In May, assets held in crypto funds hit a new record high. More and more investors are using cryptocurrencies to hedge against market volatility while also diversifying their holdings.
According to data from Morningstar on 294 crypto funds, those entities attracted more than $7 billion in net inflows during May. This marks the highest total since December, bringing the total digital assets currently undermanagement to a record high of $167 billion.
The CEO of fintech firm Aether Holdings, Nicolas Lin, said Bitcoin “is starting to come into its own again.” It is no longer seen as being just a high-volatility asset, but something that more investors are beginning to use in an effort to hedge exposure.
Bitcoin Leading the Charge
Behind the strength of its ETF launch, Bitcoin has gained more than 15% in just the last three months. Bitcoin has outperformed the 13.3% gain for gold and 3.6% rise by the MSCI World Index.
Analyst and Founder of Coin Bureau Nick Puckrin said that one of the major reasons for the rise of Bitcoin is that investors have lost faith in the general U.S. investment story. “The greenback is projected to keep plummeting, bond yields are rising, there’s uncertainty about the quality markets,” Puckrin said. “But Bitcoin seems to be holding strong.”
Institutional inflows have been a major boost over the past year. Spot Bitcoin and Ether ETFs in the United States were a major catalyst for the rise of investment funds. Coinshare data shows that Bitcoin funds attracted $5.5 billion in net funds while Ether netted $890 million across the month of May.
Crypto ETF Types and How They Work
Investors who may have been deterred from investing in cryptocurrencies have now joined the fray because of ETFs. There are four different types of crypto ETFs currently available, each of which has been designed to meet different risk levels and investor needs.
Futures ETFs
Rather than directly holding crypto, futures-based crypto ETFs invest in derivatives contracts. These contracts are essentially an agreement to sell or buy an asset at a predetermined price and on a specific date. Holding these contracts, the ETF will track predicted future price movements of that underlying cryptocurrency.
Spot ETFs
Any time that an investor buys shares of a spot crypto ETF, the manager of that fund uses those funds to buy an equivalent amount of the corresponding cryptocurrency (think Bitcoin). It then holds it in secure storage, whether that be a trusted custodian or cold wallet. Each ETF share represents fractional ownership of the crypto asset it represents.
Blockchain Company ETFs
Blockchain ETFs may not be a direct investment in cryptocurrencies, rather focusing on companies that are involved directly in the blockchain space or related technology. This is broad exposure that allows investors to benefit from the growth of blockchain technology without having to be directly involved in the volatility that comes with the crypto market.
Inverse and Leveraged ETFs
These ETFs are meant to deliver multiples of the daily performance as it pertains to a given cryptocurrency index or inverse exposure. Leveraged ETFs amplify both gains and losses while inverse ETFs benefit from declines in the price of underlying assets and vice versa. These are quite risky compared to other ETFs and tend to be better for short-term outlooks rather than long-term investment.
Advantages Offered by Crypto ETFs
Investors are rapidly seeing the perks that come with investing in crypto ETFs. Here are the most inherent advantages offered by investing in Bitcoin and Ethereum ETFs.
Professional Management
It no longer takes a deep knowledge of the technology and cryptocurrency market to invest. Crypto ETFs are now managed by investment professionals, experts with a deeper pool of resources and experience when it comes to navigating the traditionally volatile cryptocurrency marketplace.
Improved Security
Security is one of the inherent risks related to the cryptocurrency industry. By being able to invest in a regulated fund, investors don’t have to inherit the risks that come with direct crypto ownership, things like losing access to digital wallets or hacking.
Greater Accessibility
A major barrier into the cryptocurrency market for investors has been accessibility and complicated technology. Because they trade like traditional ETFs, crypto ETFs are now available through traditional brokerage accounts, removing those barriers to investment.
Diversification
Investing in crypto ETFs is a great way to gain exposure to a variety of crypto assets and related companies rather than investing in just one cryptocurrency. Investors are able to take advantage of broader market trends without having to take the enhanced risk that comes as part of direct ownership.
Challenges of Investing in Crypto ETFs
While there are clear upsides to investing in crypto ETFs, the grass isn’t always greener. There are challenges as well, including the following:
Volatility
The biggest risk of investing in crypto in any form is market volatility. Though the larger cryptocurrencies are a bit more stable, there have been major swings as well. This presents a substantial risk to traditional investors.
Regulatory Risks
One of the major challenges facing the cryptocurrency market is a changing regulatory landscape. Any shift in regulatory rules can lead to further uncertainty and have an impact on the availability and performance of said funds.
No Direct Ownership
When investing directly in cryptocurrencies, there is the positive aspect that is direct ownership. You own those assets and can do with them as you please. Cryptocurrency ETFs may be more readily available, but you don’t actually own any of the underlying cryptocurrency and are limited in flexibility as a result.
Potentially Higher Fees
Though it is not a guarantee, cryptocurrency ETFs do come with expenses like management fees. These fees can potentially erode your return potential on crypto ETFs over the long run.
Final Thoughts
In just about a year, crypto ETFs have had a massive impact on the cryptocurrency market. Growing the number of potential investors, ETFs have become more readily available and are proving to be hugely beneficial to both Bitcoin and Ethereum.
Continued institutional adoption of these entities will help, but this is a step that allows more casual investors to join the fray. It is an excellent way to mitigate some of the challenges that inherently come with investing in crypto. Most importantly, it gives investors confidence that they can invest in crypto without having to sign up for an exchange, opening a wallet, and everything that is required to invest in crypto.
